Last year I posted about how you shouldn’t overlook a high deductible plan (HDP) when selecting medical insurance. The main point was that despite having to pay a greater proportion of medical bills yourself, the premium savings would typically outweigh those higher costs and save you money. Unless you had really high annual medical expenses (roughly three times the average annual U.S. medical expense), an HDP could save you money.
Now that we’re fully through the year, I was able to compile all of my family’s medical expenses to put the theory to the test. And boy did we have a lot of them:
- New baby with 3-day hospital stay after birth
- All pre- and post-natal care for mom
- Emergency room visit and x-rays with toddler
- Overnight hospital stay with toddler
- Urgent care trip with toddler
- Pediatrician appointments for baby and toddler
- Various prescription meds associated with the above
All in, I count 51 individual claims filed through our insurance company totaling $27,627.54 in charges. That’s after all of the exclusions/discounts our carrier negotiated, full retail price was over $45,000. Talk about sticker shock!
Luckily, the vast majority of the charges were all for a single person, so once we met the individual deductible, insurance picked up a large portion of the remaining costs. We also had all of the new baby medical expenses all fall within a single calendar year. We were pregnant with the first kid in two calendar years and the deductibles and limits reset halfway through.
What We Paid with our HDP
Because we have an HDP we had to pay a higher portion of those medical bills that if we had another plan. All of our charges were in-network, which had an individual deductible of $1,500 and a family deductible of $3,000. After meeting the deductibles, we pay 15% of the charges up to an out-of-pocket max of $5,000 for individuals or $10,000 for the whole family. Our insurance pays 85% once we meet the deductible and 100% if we go over the out of pocket max.
Here is how much we pay vs. insurance for a given amount of charges for both individual and family charges. We have to incur just under $25,000 of charges for a single person before the out-of-pocket max kicks in and nearly $70,000 for the whole family. Luckily we didn’t come anywhere close to that.
In 2017 my wife hit her individual deductible with the birth of our daughter. All of my son’s toddler fun came in just under his individual deductible so we had to pay all of that. I didn’t have any significant medical expenses in 2017, so we stayed under the family deductible as well.
We only came close to hitting my wife’s out of pocket max and nowhere near the family out of pocket max. These numbers are inclusive of the deductibles above, so we had total out of pocket medical costs in 2017 of $6,223 or about one-quarter of the total charges. Insurance paid the difference, which amounted to $21,405 or about three-quarters.
When you look at it another way, you can really see who pays what. Despite having a high-deductible plan with a big out-of-pocket max, we still only had to pay a quarter of our very high medical bills for the year.
What We Would Have Paid with a PPO
My employer’s alternative to the HDP is a PPO which features much lower deductibles and out-of-pocket maxes. Deductibles are $400 for individuals and $800 for the family. Individual out-of-pocket max is $1,950 and the family is $4,600. In between it’s the same 85% coinsurance as the HDP. I’ve graphed out the charges like above and kept the scale the same so you can see how big a difference it is.
If we had a PPO last year, both my wife and son would have met the individual deductible, but my daughter and I wouldn’t have. We would also have met the family deductible. My wife would have met the individual out-of-pocket max herself and we would have gotten more than two-thirds of the way towards the family out-of-pocket max. Insurance would have picked up about $3,000 more of the charges, therefore we would have paid less by the same amount.
While we had about $3,000 higher out-of-pocket costs last year with an HDP than we would have with a PPO, the premium difference and employer contribution to a Health Reimbursement Account (HRA) nearly made up all of the difference.
Measuring All-In Cost
The true value of an HDP becomes apparent when you add in the “extras” employers use to entice us to sign up. In my case, I pay about $1,600 less per year in premiums with my employer’s HDP. Additionally, they give me $1,000 in an HRA which automatically covers the first $1,000 of our deductibles, effectively reducing our annual costs further. As an extra benefit, any unused portion can roll over to the next year.
When you factor those additional benefits in, we only ended paying $437 more with our HDP this year despite having more than $27,000 in total medical bills. I’m happy with that result, since in years with low to no medical expenses we could see a savings of up to $2,600 per year. I’ll gladly take the chance to make $2,600 vs. lose less than $500. Especially since we’re unlikely to see a year with these kind of medical bills again.
Were you surprised to see how close the plans came out to one another despite the much different underlying structures? How much are you able to save with an HDP?
Note: I created a downloadable model with the original post on HDPs so you could run the same analysis with your own plan’s numbers. You can download a copy of the model here.
John started Present Value Finance in 2017 to share his experiences and insights on personal finance to help people make better decisions and take control of their financial lives.
He achieved financial independence in 2016 by walking away from the high stress world of corporate finance to focus on his family. He’s a husband, father, family CFO, and all around finance geek.
He uses Personal Capital to track his spending, investments and investments for free and recommends you do too.